The (Shale) play’s the thing

Dickie Rambo's story has a typical hardscrabble Arkansas plot. Born and bred in Judsonia, in White County, Rambo now lives seven miles outside of Searcy in a township so small that he doesn't even know what it's called. He drove a truck for most of his life; at the end of his career, he was earning about $11 an hour before he was diagnosed with prostate cancer and retired on disability. Over the course of 30 years, he slowly added to his land holdings — 40 acres in 1979, another 130 in 1994 — so he would have enough space to graze cattle. “I've never made big money,” Rambo said. “Me and my wife just pinched pennies.”

In 2005 all that changed, and rapidly. Rambo never thought he was buying anything more than cheap swaths of lawn. But he was also buying the minerals under them. They were worthless at the time, but that was before energy companies determined there was profit to be made by drilling in the Fayetteville Shale, a natural-gas holding rock formation that has Pope, Conway, Van Buren, Faulkner, Cleburne and White Counties at its heart.

Rambo signed a lease with Chesapeake Energy, the second-largest operator in the shale (Southwestern Energy is the largest), and now his land brings in thousands of dollars a month. His windfall for February was $5,000, and that number will increase as even more wells are dug on his 200 acres. He bought a new camper and a new tractor. Things are good.

Profitable as it has been, though, the drilling has also caused Rambo headaches. It cut into his cattle operations — he had to lease an additional 240 acres for grazing in order to avoid cutting his stock. There is noise, and gas operations spill beyond original expectations. “When they tell you that they're gonna take two or three acres, they end up taking a lot more than that, because it takes roads and stuff to get into your property,” said Rambo. “If you was sittin' over here and you wasn't drawing a penny off of it, it probably would be irritating to some people.”

So by and large, Rambo is pleased with the development — it's making him a wealthier man, after all — but there's more to his situation than a fat royalty check every month.

Rambo's story speaks to the complexity of the shale play, which has introduced a great deal that's foreign to the middle of the state. Activity by the land men and gas companies — more than 550 wells have been drilled over two and a half years — mean an uncertain future for some sleepy towns. To be sure, there has been an influx of capital into many towns that never had much going for them. A gas-company sponsored study released on March 13 predicts that the economic impact of the drilling will amount to $17.9 billion.

With the sheer speed of development and the dazzling numbers, focus has tended to stray from the potential costs of the drilling. There is increased chatter about what Arkansas and its people may be giving up in the bargain. Some express concern about the toll the drilling is taking on the environment. Some feel jilted by mineral rights laws that have left them out of a rush for land leases and royalties. Some are concerned that roads are deteriorating and not being cared for properly. And all the while a debate rages about raising a natural gas severance tax, which, depending on one's view, would either give greater economic stimulus to the state or drive gas companies — along with their money — out of Arkansas. Governor Mike Beebe has called a special legislative session, set to begin Monday, to consider a proposal to raise the tax.

Whatever the outcome of the tax dispute, drilling in the shale will likely be here for decades. Which makes it worth asking: What are the tradeoffs for the companies' estimated $17.9 billion boon to the economy?

It's the environment, stupid

Some impacts on the environment are obvious. Increased truck traffic means higher emissions, waste from drilling has occasionally spilled during transport, and the noise pollution is obvious to anyone who lives near a drilling rig.

The Fayetteville Shale derives its name from the type of rock that holds the natural gas that producers aim to extract. (There is no drilling activity near Fayetteville, although the rock formation comes to the surface there.) The challenge in taking gas from the shale is that the layer of rock to be mined is thin; if you were to drill straight down into it, it wouldn't produce enough to make it worth the trouble. But the shale is long; if you can dig a hole that runs horizontally, then you can increase the amount of gas extracted. Approximately 90 percent of the state's natural gas wells are horizontal, the state Geological Survey says.

To create a well, the mining company sets up a rig that towers to a height of more than a hundred feet. The apparatus supports a mechanized drill bit that bores into the ground until it reaches the shale formation, at a depth of about 5,000 feet. From there, the bit makes a 90-degree turn and runs horizontally for another 4,000 feet. After the drillers remove the bit, they shoot water at high pressure through the new underground cavity in order to create perforations throughout its length. The water includes a chemical sand mixture. The sand keeps the smaller holes from closingand allows gas to flow out of the rock and to the surface, where it is collected.

This process is not gentle on the earth, and conservation groups are concerned. Conservative estimates say it takes a million gallons of water to create a well. (By comparison, the average American uses a million gallons of water over the course of 18 years.) Drillers are creating ponds and buying from municipal water works. Pending some last minute paperwork, Chesapeake is also planning to pump water from the Little Red River during periods of high flow. Questions have been raised whether water demand from gas companies will strain the state's fresh water supply.

Another area of concern is what happens to the water used in the drilling process. Once water has been shot through the well, it is contaminated. It contains not only sand, but also hydrocarbons from the tapped gas, salty mud and other chemical residues. Some of this water may be recycled for future projects, but otherwise it is unusable and must be disposed of. The Arkansas Oil and Gas Commission governs the disposal; the only method it allows is deep-water injection at permitted facilities. (Companies can also haul their water out of state.) This method is permitted by the federal Environmental Protection Agency and is widely used, but there are concerns that not enough is known about the process to say it won't affect groundwater.

In testimony given to the House Oversight Committee last year, Amy Mall, a policy analyst at the Natural Resources Defense Council, pointed to a number of exemptions from the Safe Drinking Water Act given to gas companies injecting wastewater into the ground. She also cited a 1989 study that found 23 cases of drinking water sullied by underground injection.

The Arkansas Department of Environmental Quality (ADEQ) also has oversight over activity in the Fayetteville Shale. ADEQ is required by law to conduct its own field inspections, but it relies to a large degree on citizen complaints. In 2007 alone, ADEQ responded to 933 of these across the entire state.

According to ADEQ spokesman Doug Szenher, most complaints are cleared up by sending a letter to the offender, if he can be located. In more extreme cases, ADEQ may initiate a consent order, which outlines penalties and corrective actions that the violator must take. Only if he refuses to agree to the consent order will ADEQ refer the violator for a further legal action. The process can take months. Szenher said there are currently 10 pending consent orders at ADEQ.

While some have complained that ADEQ is not proactive enough in pursuing fines, Szenher argued that the agency needs to concentrate on fixing the problems it hears about in complaints first.

Whatever the enforcement philosophy, ADEQ barely has enough manpower to handle its current workload. In November, Gov. Mike Beebe said that the state would have to hire more inspectors to ensure compliance with environmental regulations. But new hands won't come aboard at ADEQ before the 2009 session — assuming the legislature funds them.

Some lawmakers are already gearing up to put environmental issues at the top of the agenda. State Rep. Betty Pickett (D-Conway), whose bill in 2007 to create environmental regulations was dropped because of opposition by company lobbyists, has already run into opposition this time around. A resolution she introduced before the Joint Performance Review Committee that called for state agencies to work with conservation groups and the gas industry to regulate drilling activity was shot down before ADEQ had a chance to give scheduled testimony at the March 14 hearing. The resolution, which would not have had the force of law, proposed to coordinate environmental oversight of the shale through the Oil and Gas Commission.

“There are like 14 state agencies that have some interest in the oversight of the drilling,” said Pickett of her proposal. “All of those agencies want to do their job, but they can't do their job if they don't know what's going on. It boils down to a notification system. All the laws are there to protect the environment if everybody who is in charge could just be notified.”

Pickett said she might ask Gov. Mike Beebe to present the resolution to the legislature.

The death of Pickett's resolution is not exactly a surprise. Some watchdogs have urged a different path of action. “Gas companies are very sensitive to publicity,” said James Bradbury, a Texas lawyer who has represented landowners in Fort Worth, where there is drilling similar to that in the Fayetteville Shale. “If you get enough people making calls for change, they will bend. Rather than mapping out a strategy at the legislature or ADEQ, what's probably more effective is calls by citizens and landowners to see better practices, because they're very hard to legislate.”

Paradise and profit

imperiled

Robert Fulks, a mustachioed, gruff-voiced retiree who worked for 35 years in construction, represents a cross-section of the players who have an interest in the Fayetteville Shale. His family has owned land in Central Arkansas for generations; he tells stories of ancestors settling down in Quitman after the Civil War. He's deeply concerned that gas drillers will mar the back of his 30-acre plot in Bee Branch, in Van Buren County, where he keeps a cabin with his wife, Roxianne.

“I'm sorry to see the old country go,” he said as he drove around the county pointing out the numerous well-pads that dot the landscape. Rigs stood on the pads during the 30-day period it takes to dig a well; once the gas was tapped, the rigs moved out and left a bare patch of gravel, a gash through what was once solid forest. The pad could be there for as long as 30 years, the estimated time it takes to empty a gas well.

Fulks also bemoaned the murky state of the creeks, many of which had been muddied by silt run-off from drill-related digging.

Is gas drilling a positive or a negative? Fulks called it a draw. “There's some people in the world that all the money in the world don't make happy,” he added. “I'm one of them.”

But Fulks is not so sentimental about the landscape that he isn't getting in on the action: He intends to profit from a second patch of fallow land in Morgantonthat he inherited from his father. He hopes that drillers will eventually build four pads on that plot. As long as the gas companies don't try to encroach on his Bee Branch haven — and he says he'll take them to court if they do — he is happy with them drilling on the 34 Morganton acres.

Fulks has already leased out portions of the land at $600 an acre and reserved a 20 percent royalty payment on the value of any gas that may be extracted in the future. He purchased a used Jeep with the payment. He hasn't seen any royalty money yet.

But he won't be able to make money off the entirety of his property. State law separates land ownership from mineral rights ownership; just because you own a plot of land doesn't necessarily mean you own what's under it. Fulks doesn't have mineral rights on 20 of the 34 acres under his Morganton land. Lease payments on the 20 acres will go elsewhere.

The confusion has been finding out where. According to his research of government records, the Morganton mineral rights are owned by the estate of W.L. Pickens of Dallas. The problem is that Fulks has no idea who either Pickens or his heirs are. Pickens bought the rights before World War II and, as far as anyone can tell, never lived in Van Buren County. Fulks doesn't own the mineral rights to his 30-acre Bee Branch plot either. They passed through a series of similarly shadowy owners.

Mineral owners are required to pay property taxes. If the property taxes have not been paid and the landowner makes a claim to the mineral rights, the state sends a letter to the mineral rights owner at his last known address. If there's no response, the state will issue the landowner a limited warranty deed to the mineral rights as long as he pays back taxes and proves land ownership.

Fulks went through this process, but gas companies refuse to honor his state-issued deed and question its legality. For now, lease money for land where mineral rights ownership in question is put into a state-controlled escrow account.

Jerry Bradshaw, the mineral leasing officer for the state land commissioner, said that the problem of mineral rights severance isn't as extreme as some people make it out to be. He doesn't have hard figures, but he estimates that 85 percent of landowners in the affected area also own their land's mineral rights. A spokesman for Chesapeake said that about 80 percent of the landowners it deals with have mineral rights.

Those high rates are little consolation to people who don't own the mineral rights. “There are just going to have to be some rules made by the legislature as to who gets mineral rights and who don't,” said Fulks.

Rep. Pickett said she knows of no active legislative group working on the issue. She sponsored a bill in 2007 that would have restored dormant mineral rights to landowners, but it died in committee. “It was modeled after National Conference of State Legislators model legislation,” said Pickett of the proposed law. “There's a precedent for it, as long as you give those people due process in losing those mineral rights, if you can find them. The argument against the legislation is that you just can't take someone's property, under any circumstances.”

Small-town change

In unincorporated Albion Township, where Chesapeake has Arkansas offices, the gas station has reopened to serve hot lunches to the blue-collar crowd. Business wasn't terribly brisk on a recent afternoon, but several workmen came in to pick up a bite. One of these was Randy Coyle, a house builder. He said the drilling has not affected his business very much — many drillers stay in temporary housing — but that overall it has been a positive for Searcy, the seat of White County located eight miles down the road.

Buck Layne, head of the Searcy Chamber of Commerce, agreed. “We are certainly benefiting from the Fayetteville Shale play,” he said. “We can identify about 60 oil and gas companies that are in White County. We think that represents about 1,000 jobs.” In addition to drilling companies such as Chesapeake, service companies that do contract work on rigs have also moved to Searcy. These include BJ's Service, Weatherford, and Liberty Pressure Pumping. (Liberty has been penalized by Texas authorities for building facilities without a proper permit.) Halliburton has also leased properties and begun to establish operations in Searcy.

Layne said jobs indirectly related to the drilling, while more difficult to identify, have also had a definite impact. “There's some new apartments going in and some new construction. Quite a bit, relative to Searcy.” Several new restaurants have moved into town or are preparing to in the future. Sales tax revenues were up 11 percent in 2007 from the previous year. “This is the closest thing to a boom our county has ever experienced,” Layne said.

Some drilling companies have taken a direct role in the community. Chesapeake, for example, donated $200,000 to Arkansas State University-Searcy to create drilling courses and a rig simulator.

From Clinton, the seat of Van Buren County, where Petrohawk has a state base, Mayor Roger Rorie offered nothing but positives about the companies. He said that they offered invaluable cleanup assistance after the Feb. 5tornadoes.

But in conversations with people who live around the drilling, one negative constantly comes up: Local roads were not designed to withstand so many heavy trucks, and traffic is awful. In some cases the problem can transcend the mundane. Last December, two children were killed in White County when a truck transporting a rig crossed the center line and hit their parents' car.

Safety has been an issue for White County Judge Michael Lincoln, who oversees roads. In addition to adding truck traffic on commonly used routes, drilling companies have built side roads — essentially dirt paths — that cut into leased property and lead to rigs. Occasionally the roads go in more than a mile, which makes it difficult for medical personnel to reach the rigs if there's an accident. “One concern I have with those side roads is with our 911 system,” said Lincoln. “A lot of those side roads don't specifically have a 911 addressing system. We're trying to make first responders in White County aware of what drilling is going on.”

Lincoln also has to deal with the headache of how to pay for roads that increased usage has worn down. He said that the county takes care of gravel road repairs itself, but that it gets some help for drilling-related damages on hard surfaces. “We have a gentleman's agreement [with the gas companies] that if it's related to their direct use of the roads, then whatever materials we use to get it back to the shape it needs to be in, they pay for.” Chesapeake estimates that it has paid more $300,000 in road cost reimbursement since January 2007.

A looming battle:

The severance tax

A $300,000 road tab pales in comparison to the billions of dollars the state needs for highways. Some state officials, including Gov. Mike Beebe, want gas companies to contribute to that cost by paying a higher severance tax on the gas they take from the ground.

Currently gas producers pay only three-tenths of a cent per thousand cubic feet of gas to the state on natural gas production — one of the lowest rates in the nation.

But the idea of an increased severance tax has been highly controversial. An association of royalty owners, concerned that the tax will reduce payments from gas companies, has come out against it. Some legislators have also been vocal in their opposition. Only nine votes are needed to defeat the tax increase in the Senate, where the state Constitution requires a three-fourths vote to legislate most tax increases.

For years, the consensus has been that getting the legislature to enact a severance tax was an impossibility. But the outlook changed dramatically in January. Sheffield Nelson, a Little Rock lawyer and former head of Arkla Gas, proposed a ballot initiative to leapfrog the intransigent legislature. His initiated act would put a 7 percent tax on gas, calculated on the price of gas at the time of extraction. The proposal would earn between $60 million and $100 million for the state annually. Arkansas made $619,417 last year at the current severance tax rate.

The attorney general's office approved Nelson's initiative. He must get 61,974 voter signatures to ensure its placement on the ballot. The initiative would use 80 percent of severance tax revenues on roads and highways and 20 percent on higher education.

Nelson's proposal spurred Beebe into action. Though the governor previously favored waiting until the 2009 legislative session to move on the tax, he quickly began private negotiations with gas producers on an increase they'd accept. He wanted a meaningful rate — he wasn't willing to go below 5 percent — and he wanted it to go just to highways and roads. The latter condition was a reflection of dwindling state coffers — as fuel prices increase and drivers use more fuel-efficient vehicles, gasoline taxes become a less reliable way to fund highways.

There has been a robust debate about the optimal level of taxation. Proponents of a severance tax increase have two big gas-producing states, Texas and Oklahoma, as handy benchmarks. Those states charge a rate of 7.5 percent and 7 percent respectively. But gas companies have complained that Nelson's proposed 7 percent rate does not account for exemptions they receive in those states. In Oklahoma, horizontal wells drilled after 2002 are exempt from severance tax for four years or until gas production pays for the cost of the well. Texas offers a complex severance tax reduction that depends on drilling costs.

Nelson argued that the legislature could add any necessary exemptions to the initiative once it passed. But gas companies said that an increased tax could cause them to reduce production. At a February meeting of the Conway Chamber of Commerce, Southwestern Energy Harold Korell said, “If we pay more in severance tax, the equation is simple: We'll drill less wells.”

Nelson is cool to that threat, however. At the January press conference introducing his ballot initiative, he said, “When you've invested $1 billion in an industry, you don't turn and run because of a severance tax.” He has repeated that argument since. Last month, he invited Korell to debate the tax. Korell declined.

As Nelson continued to broadcast his proposal to whomever would listen, Beebe's negotiations with the gas industry continued. The prospects for a special legislative session didn't look good on March 4, when Beebe said that talks with the gas companies had stalled. He said he might have to work on his own ballot initiative.

That possibility seemed to light a fire under gas producers. Days later, on March 11, Beebe announced an agreement with gas companies on a 5 percent severance tax, with a lower rate of 1.5 percent for three to four years on new wells, plus a low tax rate for existing low-production wells. He began lining up enough legislative votes to justify a special session, which he's called for March 31. If his proposal doesn't pass, the ballot initiative will be on and voters can expect to see petition gatherers at May primary polling places.

It remains to be seen whether Nelson and Beebe will combine forces to put the proposal on the ballot — though Nelson has seemed open to Beebe's announced compromise, even though it means giving up a share of the money for colleges. But the prospect of an initiative has already been enough to spook the state's anti-tax forces. On March 5, Tim Griffin, the former U.S. Attorney from the Eastern District of Arkansas, created a committee to fight against a ballot question that would raise the severance tax. That is surely only the opening salvo of a long battle if the tax is to become an issue in November.